Celebrating 70 years of VAT
This year marks the 70th anniversary of the VAT – the tax which represents the highest percentage in tax revenues for governments around the world. For some countries, it can be as high as 37% to 40% of the countries’ total yearly collection earnings.
However, this tax would never have existed if, on April 10th 1954, a man in France named Maurice Lauré did not have the vision to create a tax that would not tax the turnover but the added value produced by companies. This vision has clearly been a huge success, so much so that the VAT has even been widely referred to as the “fiscal Grail”.
On April 10th 1954, the French National Assembly, under the presidency of René Coty and with Edgar Faure acting as Ministry of Finance, voted in favor of instituting a VAT tax that would revolutionize not just France, but the rest of the world as well.
Shortly after its approval, the VAT tax, or TVA ajoutée, in French, went exclusively to fund the state’s revenues in full. Nevertheless, after two reforms, namely that of the housing tax and that of the CICE or tax credit for competitiveness and employment, part of the VAT revenue began to go to local authorities and another part went to replace social contributions.
The success of this revolutionary tax did not wait long before it was adopted by its European neighbors. First, Germany instituted the VAT tax in 1968, then the Netherlands in 1969, followed by Belgium in 1971, and then moving on to Italy and the United Kingdom, in 1973. Nowadays, more than 150 countries in the world have their own version. Curiously, the only state that is part of the OCDE’s 38 countries membership and which does not have the VAT are the United States, a rare exception in a situation that has otherwise become the norm.
Maurice Lauré, the man, the myth
Maurice Lauré’s contributions were instrumental. Born in Marrakech in 1917, he went on to study law in Paris’s École Polytechnique and obtained his PhD after World War II.
In 1945, just after the war, he joined the Ministry of Finance as a tax inspector. His career moved forward very quickly and in 1952 he was appointed as joint director to the DGI (Direction Générale des Impôts) – the agency he helped create. There he established brigades capable of carrying out fiscal verifications.
In 1954, Maurice proposed a theory of indirect taxation on consumption. This theory was finally approved in the French National Assembly and it contained a proposal to liquidate and collect the tax at each stage of the production and marketing process with a system of deduction of the previously collected tax.
Years later, Maurice was also behind the idea of developed countries implementing a tax on the imports of goods and services from third-world countries, an idea he later repudiated.
How is VAT seen today in France?
In France, VAT brings significant revenues to the state, as in 2023 it roughly represented 37,5% of gross tax revenue, or 183.9 billion euros. It is applied at 20% for the standard rate, between 10% (for bar and restaurant consumption) and 5.5% for the reduced rates (food products), and at 2.1% for the super-reduced rate (for refundable social security medicines and newspapers).
Even though VAT is an important revenue asset for the government, it is not free of discrepancies. For example, the Inequality Observatory, in France, states that “it weighs more heavily on low-income household expenses than in high-income household expenses”. Another controversy is the definition and difference between luxury and basic products, as for instance, black chocolate is less taxed than milk chocolate.
This controversy has reached the highest pinnacles of power in France as VAT suppression on basic need products has been considered by the RN (Rassemblement National). On the opposite side of the political spectrum, the current Minister of Economy, Bruno Le Maire, has recently suggested in an interview to Sud-Ouest’s journal to put in place a “social VAT” to “increase VAT in order to compensate a raise in net salaries with the objective in mind of rewarding work”.
For now, the land that saw the birth of the highest revenue assurance tax to date, the Value Added Tax, will not be introducing new reforms to the VAT, at least not anytime in the near future.
